Are Arconic Inc.'s (NYSE:ARNC) Interest Costs Too High?

Mid-caps stocks, like Arconic Inc. (NYSE:ARNC) with a market capitalization of US$9.3b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. This article will examine ARNC’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into ARNC here.

Does ARNC Produce Much Cash Relative To Its Debt?

ARNC has shrunk its total debt levels in the last twelve months, from US$6.8b to US$6.3b – this includes long-term debt. With this debt payback, ARNC currently has US$2.3b remaining in cash and short-term investments to keep the business going. Additionally, ARNC has generated US$217m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 3.4%, meaning that ARNC’s debt is not covered by operating cash.

Can ARNC pay its short-term liabilities?

At the current liabilities level of US$3.5b, it seems that the business has been able to meet these obligations given the level of current assets of US$6.6b, with a current ratio of 1.87x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Aerospace & Defense companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Can ARNC service its debt comfortably?

With total debt exceeding equity, ARNC is considered a highly levered company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether ARNC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ARNC's, case, the ratio of 3.44x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although ARNC’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around ARNC's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how ARNC has been performing in the past. I suggest you continue to research Arconic to get a better picture of the mid-cap by looking at:

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